walkingmzungu #8,
It's used in both ways. You can use it in cooking to spice up the dish, or you can add it to your goulash you've been served at a restaurant, like you'd use salt or ground pepper.
I also use it both ways. There are a few recipes I always use it for. I have some smoked paprika that I got for a particular recipe but it has a very distinctive flavor that isn't very versatile as far as I'm concerned. It can't be used in place of regular paprika for the most part.

I think that when I went to Hungary at the age of 15, was the first time I'd particularly come across paprika and been conscious of it, although I did know vaguely what it was. There and at that time, anyway, tables in restaurants (at least in the few we were in) had salt and paprika instead of salt and pepper, which seemed very exotic to me at the time.

Do people outside the US say paPREEka or PAHpreeka? I think Americans tend to say the first.